Sunday, July 26, 2009

The financial decisions people have to make today are quite complicated, and the financial markets we interact with have made finances even more complicated. So, in such a complex world, where do people turn to for advice when making financial decisions? Survey after survey show that one of the primary sources of information are family members. Colleagues and friends are another common source. This is an important finding. A lot of financial transactions happen within the family and family members naturally exchange information and advice. Moreover, we spend a lot of time at work and the workplace is a natural environment in which to get information and exchange ideas. However, is it a good idea to rely mainly on family and friends for financial advice? Because there is inherently asymmetric information in this type of exchange (those who ask know less than those who provide information), it may be hard to know whether the advice one is receiving is sound. We trust family members to do right by each other, and it might be possible to know whether someone has made good decisions and trust that it is safe to follow in their footsteps. I have an older sibling and I have learned a lot by simply following some of the decisions she has made. But financial acumen is not always verifiable. We cannot always know whether our friends have chosen the best mortgage, how they invest their retirement wealth, and what they do with their credit cards. People do not go around with financial statements around their necks and the fact that someone has a nice house and a nice car might be an indication of a lot of debt rather than a lot of savings. Trust is important when it comes to financial information, but should trust trump expertise? If people around us are not really more knowledgeable in finance than we are, do we improve our knowledge by seeking advice from them? Ask yourself: would you trust a family member who is not a health care professional for medical advice? Finance is no less complicated than health, and the consequences of bad financial decisions can be as dire as taking the wrong medicine or leaving an illness untreated.

I am always intrigued by how much people like to dispense financial information and financial advice. Because I have been traveling a lot in the past few months, I have gotten a good deal of financial information and financial advice from taxi drivers, strangers at the airport, and hairdressers. One participant at a conference told me that in his town, everybody gets financial advice from the butcher. I will keep this in mind when I buy my steaks. I like that people are paying so much attention to finance and financial matters these days, and it’s interesting to hear what people are talking about. Some of the suggestions and theories I have heard are brilliant, some are odd, but others are just plain wrong. Finance and financial principles are grounded in theory: they follow laws that do not change based on who is in power or which state you live in; the power of interest compounding is no different in Florida than in California, and it does not change depending on whether the president is a Republican or a Democrat.

If we are so eager for financial information, there is a clear role for a provider of information—a reputable, independent, and expert source. For example, Social Security started to send around statements about Social Security benefits in 1995. This is a laudable initiative and studies have shown that these statements have changed people’s behavior. The Department of Labor is hard at work to find ways to improve and streamline the information provided by pension plan providers. The Securities and Exchange Commission is looking for ways to better inform investors.

I have my own recommendation to offer. If you need financial information, use www.mymoney.gov. It was built by experts to provide financial advice for citizens. It is from a reputable institution that cares about people making good decisions.

Let’s not mix roles. There is a joke in Italian that goes approximately like this: In heaven, the Italians are the cooks, the Germans build cars, and the Swiss are in charge of running the trains. In hell, the Germans are the cooks, the Swiss build cars, and the Italians are in charge of running the trains. As you can see, we Italians like to poke fun at ourselves. But the same principle applies here: ask taxi drivers for directions, hairdressers for a good shampoo, butchers for a good sausage, and your government for good financial advice! You would not ask a taxi driver for a haircut or send to the Treasury for sausage, would you?

Friday, July 3, 2009

At an international conference in Washington, D.C., on financial literacy last year, the Retirement Commissioner from New Zealand stood up and stated that New Zealand has the best website in the world to promote financial literacy and financial education. I liked her instantly; you need to have a lot of guts to make that statement in front of an international audience of academics and policymakers, and possibly a good website. I checked out that website and good it is! It is called “Sorted,” a term that New Zealanders use to mean figuring things out and getting ready (http://www.sorted.org.nz/). The website is very well organized and provides information for financial decisions at every stage of life. One can find information about managing debt, mortgages, investment, and planning for retirement. And there is a variety of calculators as well to help people figure out the interest payments on their credit cards, how wealth can grow with the power of interest compounding, how much to save for retirement, and much more. On the website one can also take a money personality test “to help you work out your financial strengths and possible blind-spots.” I went through the questions and was told (among several other things) that when it comes to money matters, I am cool and dispassionate! I like that, too.

As I have argued before, citizens in every country could use one reliable, accurate source of information for managing their financial decisions. However, what really puts New Zealand's website over the top is the fact that it is so engaging. The information is not provided in those sterile graphs and statistics that even people with advanced degrees understand only after a bit of head scratching. One can watch a movie about investment, saving, and retirement. The soundtrack is so good that it made me play the movies a couple of times to listen to it again. One can also listen to stories and follow the journeys of Liz, Carl and Jess, Rochelle and Junior, and Raeanna and learn how they used the tools available on the website to help organize their finances. It is not just about information and simplifying decisions, but also about implementation. The website describes the steps that one has to take, for example, to set goals and to do a budget. And there are tips on a variety of topics, including how to cope with today’s financial climate. The information provided online is also available in booklets that can be downloaded or ordered for free.

According to a survey that was just released in June 2009, one-third of New Zealanders had either visited the website of the Retirement Commission or read one of the booklets, and a quarter had done so within the past twelve months (http://www.financialliteracy.org.nz/.) This is an extraordinary result. In my view, there are several reasons for this success. First, the Retirement Commission is an autonomous entity with the mission to “educate and inform New Zealanders from age 5 to 105 about managing their personal finances to ensure adequate provision for retirement.” Thus, the citizens of New Zealand know where to go to get a reliable source of information. We do not need many web sites, we only need one! And both the website and the work of the Retirement Commission are well advertised in the media and New Zealanders know about it. Most importantly, as the Retirement Commissioner remarked, it is a good website!

I visited the Retirement Commission last week to speak at their Financial Literacy Summit. I discovered that they designed a survey of financial knowledge in 2005, well before other countries. The development of a national strategy to lift New Zealanders’ financial literacy was announced at the inaugural Financial Literacy Symposium in Wellington in December 2006 and launched in 2008. And if the new survey in 2009 is any indication, 43 percent of New Zealanders are now scoring high on financial knowledge, and women and low income households are among the groups with the biggest improvements since 2006, when data from the first survey was collected. At the conference last week, the Secretary for Education announced that financial education will become part of the curriculum in schools throughout New Zealand. Moreover, the advisory committee for the National Strategy for Financial Literacy (composed of the Governor of the Reserve Bank of New Zealand, the Chair of the Securities Commission, the Chair of the Investment, Savings and Insurance Association, the Secretary for Education, the Associate Dean for Mâori and Pacific Development at the University of Auckland Business School, and the Retirement Commissioner) will now report to the Minister of Finance twice a year on progress in implementing the strategy.

As you may know, New Zealanders are also called “Kiwis.” The Kiwi is a flightless bird. As the story goes, Tane Mahuta, the lord of the forest, was surveying his ferny domain and became concerned that his children, the trees, were ill from being eaten by bugs. He called the birds together to ask if any might be prepared to eat the bugs, which would entail living on the dark, damp forest floor. The Kiwi put himself forward. As a reward it became the best-known and most-loved bird of all.

It is good to have such a symbol in a country so hard at work to improve financial literacy. Can they improve financial literacy? The answer I heard at the conference was: Yes, we can!

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About Me

Annamaria Lusardi is the Denit Trust Endowed Chair of Economics and Accountancy at the George Washington School of Business. Previously, she was the Joel Z. and Susan Hyatt Professor of Economics at Dartmouth College. She has taught at Dartmouth College, Princeton University, the University of Chicago Public Policy School, the University of Chicago Booth School of Business and the Graduate School of Business at Columbia University. From January to June 2008, she was a visiting scholar at Harvard Business School. She has advised the U.S. Treasury, the U.S. Social Security Administration, the Dutch Central Bank, and the Dartmouth Hitchcock Medical Center on issues related to financial literacy and saving. She is the recipient of the Fidelity Pyramid Prize, awarded to authors of published applied research that best helps address the goal of improving lifelong financial well-being for Americans. She holds a Ph.D. degree in Economics from Princeton University.